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Defending SocGen

By Floyd Norris March 10, 2008 8:18 pmMarch 10, 2008 8:18 pm

My Friday column criticized the French bank Société Générale for its decision to report its 2008 losses from fraudulent trading in the 2007 year, and quoted one former and one current member of the International Accounting Standards Board as saying the rules were not written to allow such things.

SocGen would not make anyone available to defend the decision, and the audit firms that signed off on it were also silent, so there was a lack of defense for the decision in the column. As I called around, I found no one willing to defend the action, on or off the record.

But SocGen now has a vigorous defender, and I want to let readers see his argument, which is mostly an attack on me. Kurt S. Schulzke describes himself as a lawyer, accountant and associate professor of accounting and business law at Kennesaw State University in Georgia.

Professor Schulzke thinks I am making a big fuss over not very much:

“More accurately, the furor exists in some accounting circles. SG’s Big-Four auditors have signed off on the financials. Furthermore, during SG’s 4th Quarter Analyst Conference Call, no call participant found the 2007 placement of the Kerviel loss worth a question. For them, it was a non-issue.”

The professor goes on to add:

“I find Norris’s concerns convoluted. He appears to argue that if Société Générale can use the ‘true and fair view’ exception to show the Kerviel trading losses (some of which arguably occurred in 2008) in 2007, other more terrible things will happen unless the U.S. Securities and Exchange Commission stops allowing non-U.S. companies (and never allows U.S. ones) to use IFRS at all or, at least, not without direct U.S. oversight.”

Some of which arguably occurred in 2008? If Professor Schulzke had read SocGen’s annual financial statements, rather than just listened to analysts who did not criticize the accounting, perhaps he would have noticed that SocGen reports that NONE of the losses occurred in 2007, and that ALL of them occurred in 2008.

Mr. Schulzke “should” know that there are clear rules for revenue/profit/loss recognition in all accounting/financial jurisdictions. Over the past ten years I have worked with several French banks and mutinational companies including Societe Generale in project finance on both sides of the Atlantic, and I must say that they are as sophisticated as they come, when it comes to such matters.

This is not an accounting, financial nor a legal matter. It is simply a “political” consideration taken under distress and a difficult environment.

As we have witnessed in the US, the Federal Reserve and the current GOP Administration are taking unusual “political” measures under the current “exceptional” circumstances to “rescue” the capital markets, the mortgage/housing industry and the US consumer as a whole.

Hassan is quite right above, and the dangers are of the sort he described before.

[All indications are that as the current criminal investigations into this whole matter produce definite targets/fault lines, I am not certain if the Bond Rating Agencies are capitalized well enough to withstand the massive civil and criminal lawsuits in the order of hundreds of billions of dollars…. ]
— Posted by Hassan Azarm

I have a feeling that greater problems Hassan refers to are being ignored or even worsened by investigating the breaking of rules in the past in cases where they have already been discovered, that will cause the wholesale collapse that we fear. We know that the breaking of rules has been widespread, but the hunting of those that have already been found out is not the first priority now.

So there will be a fudge. Some regulators will turn a blind eye to economy with the truth because they fear to cause this general collapse, so the pretense will go down as true in the record, and other instances, the letter of the law will be enforced, and a business has lost the lottery.

Whatever happens, despite all charges of favoring the banks and “moral hazard”, many businesses are going to be bailed out; this is not the time to punish them. The punishment will often far exceed the crime. It also threatens to damage the rest of us. If the horse has bolted, you don’t sack the stable-lad then but send him to find the horse or get another.

Some sheriffs have been asleep on the job, as well as some robberies have taken place. This is not the time to rake over past grudges, however justified. I am afraid this does come down to individuals, and as it affects Cate Long, if I understand things aright she was trying to wake the sheriff, the time to act on her charges was in the past. At the moment, it is to recognize her as having been correct, but leave the action until the storm has passed.

“Forgive” businesses any sins, rather than cover them up, not that they would like it particularly. None of us, the public in Britain as well as the US, have been eternally vigilant, and this should teach us to listen to the Cate Longs more in the future.

I look to the NYTimes to keep me abreast of facts of situations. Here, in his usual good form, long-time financial reporter of said newspaper, Floyd Norris, keeps we readers up-to-date on the news. Kurt Schulzke, in his usual good form defending,knee-jerkwise, business folks with his ‘facts’ which are not facts, attacks the Times from his Southern tier of the Republicanism which must be done away in the coming election. A high school teacher of mine in the 1940’s brought in the Times for discussion and a social studies program. I keep thanking her all of my now 87 year-old life.

Morris (#4)–“Kurt Schulzke…attacks the Times from his Southern tier of the Republicanism which must be done away in the coming election.

Yesterday a blog poster signed off as a “Recovering Republican”. A more apt description of those of us who’ve restored our sanity having backed the Hooverites in today’s GOP is “Baalay Tschuvot”. (Hebrew–Masters of Repentence!)

This story brings to mind Woody Allen’s movie “Everybody Says I Love You”. In it there’s the adolescent son of a wealthy cosmopolitian Manhattan family who goes right wing on his distressed parents. He’s cured when his doctor found the youngest had a treatable neurological disorder!

The latest development on Societe Generale is that they have successfully raised $15.56 Billion through a “public” rights offering and have repaired the hole in their balance sheet. The subject financing was “oversubscribed” and the Bank has now brought back their T1 capital ratio to above 8%.

As we can see, there is sufficient “cash” in the market and rights/warrants offerings can deal with capital deficiencies in an “acceptable” time frame and there is no need to deny, wait and end up pan handling by calling on the Sovereign funds to bring back the balance sheets in line to cover the risks taken in the years past.

Perhaps Citigroup and others may want to consider similar moves and stop wasting their time.

The Affordable Care Act imposes economic burdens that are the equivalent of taxes, an economist writes. Read more…

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